Brahim’s Holdings Bhd
(Sept 15, RM1.35)
Upgrade to buy with target price of RM1.62: The Edge weekly, quoting industry sources, has reported that Brahim’s is in talks with Ekuiti Nasional Bhd (Ekuinas) to buy the latter’s Burger King (BK) franchise. The deal is expected to be sealed soon.

Ekuinas spent RM68.2 million on the 74.1% stake in Cosmo Restaurant Sdn Bhd, the BK franchise holder in Malaysia, in September 2011 and, subsequently, acquired the remaining 35.9% stake for RM48.8 million in December last year. Collectively, Ekuinas had spent RM117 million on acquiring the BK franchise.

We are positively surprised by the news as it will allow Brahim’s to diversify its earnings from Malaysian Airline System Bhd’s (MAS) catering contract. MAS currently contributes approximately 75% and 90% to Brahim’s revenue and profit respectively.

Furthermore, the recent MH370 and MH17 disasters had also significantly impacted Brahim’s operations, resulting in weaker-than-expected results for its first half ended June 30 of financial year 2014 (1HFY14). Recall that Brahim’s revenue and profit after tax and minority interest dropped by 0.5% and 29.3% respectively in 1HFY14.

In addition, with MAS’ privatisation and various efforts being taken to turn around the loss-making entity, we do not dismiss the possibility of Brahim’s experiencing a slight compression in margin from the lower average price of meals charged.

Hence, we believe that it is sensible for Brahim’s to take the initiative to acquire BK to diversify its future earnings, as well as to make up for the lower profit in its airline catering business segment. The pricing for the acquisition, however, was not revealed.

We also strongly feel that Brahim’s would be eyeing more merger and acquisition (M&A) opportunities in either the food and beverage (F&B) industry or airline catering business segment, diversifying and expanding its foothold internationally.

Risks to our calls include pandemic outbreaks, slowdown in passenger movements, termination of concession agreements, relatively elastic demand, appreciation of the US dollar and depreciation of the ringgit.  — HLIB Research, Sept 15
 

This article first appeared in The Edge Financial Daily, on September 17, 2014.